‘Not a Positive Signal’: The Economic Impact of Arizona’s New Immigration Law

Arizona’s controversial new immigration law reflects a sharp political response to long-simmering conflict over immigration policy in a nation that takes pride in its history as a society built with the help of people from many lands.

Wharton faculty say the timing of the legislation is in part a reaction to stress brought on by the economic downturn, even as declining demand for labor has slowed immigration into the United States. While the statute has drawn widespread attention, faculty contend that it is unlikely to spur major change in broader immigration policy, at least in the near term. “It seems odd to me that this issue came up in Arizona now, given that the economy is so flat,” says Wharton management professor Peter Cappelli, who suggests that Arizona politicians are looking for a “scapegoat” by “saying there are no jobs because of illegal workers. It’s easy to blame immigrants.”

Furor over the new legislation and calls for boycotts of the state erupted after Arizona governor Jan Brewer signed the law on April 23. Set to take effect 90 days after signing, the law would require police officers to detain anyone they suspect is in the country illegally. Officers would be required to verify the suspect’s status with federal officials unless that would be impractical or impair another investigation. Individuals found without documentation would be charged with a misdemeanor punishable by up to six months in jail and a $2,500 fine before being deported.

Currently, officers can check immigration status only if a person is involved in another crime. The new mandate also permits lawsuits against local governments or agencies for failure to enforce federal or state immigration law. Police departments are now drawing up guidelines to help officers train for enforcing the new legislation.

U.S. Attorney General Eric Holder this week announced that the U.S. Department of Justice may raise a rare federal legal challenge to the state statute. “I think we could potentially get on a slippery slope where people will be picked on because of how they look as opposed to what they have done. That is … something that we have to try to avoid at all costs,” Holder said during a Sunday television appearance.

Despite such criticism, a New York Times/CBS poll found that 51% of Americans believe the Arizona law is “about right” in its approach to undocumented workers and an additional 9% say Arizona doesn’t go far enough. Another 36% of respondents believe the law goes too far, and 4% reported they had no opinion.

Cappelli says the legislation makes for “odd political bedfellows,” pairing business owners and low-income Hispanic workers against the statute. Business owners want to be able to continue to tap into the immigrant regulated labor pool while workers contend the law institutionalizes racial profiling. On the other side of the argument is a coalition of middle- and upper-class homeowners, who fear their neighborhoods will deteriorate if immigrants continue to move into the state, and low-wage native-born Americans who worry that their jobs are at risk as a result of competition from immigrants who are willing to work for even less, Cappelli says.

Protests and Boycotts

The Arizona immigration measure has prompted calls for economic boycotts of the state. In a widely noted gesture, the Phoenix Suns basketball team wore jerseys reading “Los Suns” during a game on May 5, the Mexican holiday Cinco de Mayo. Suns managing partner Robert Sarver said Arizona’s new law calls into question “our basic principles of equal rights and protection.” In addition, the Major League Baseball players’ union issued a statement condemning the law, and a Senate bill has been introduced that would take the All Star game away from Phoenix in 2011.

Meanwhile, Phoenix officials are fearful that the city could lose $90 million in revenue if organizers of 19 large, scheduled events take their business elsewhere in protest over the immigration law. “We have an image and public relations problem of what might be unprecedented proportions,” deputy city manager David Krietor told The Arizona Republic.

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Cappelli notes that although Martin Luther King Day became a national holiday in 1986, Arizona did not recognize the holiday until 1992. The National Football League moved the 1993 Super Bowl from Arizona to California in opposition to the state’s refusal to observe Martin Luther King Day. “Arizona has been through this before,” he says, adding that proposed boycotts “might have some effect that is not trivial. The Hispanic community is big in the United States.”

According to Albert Saiz, a Wharton real estate professor who does research on immigration, Americans identify with immigrants and are generally sympathetic toward them because — except for Native Americans — their own family histories involve a move from some other country. At the same time, he says, research shows Americans are less inclined to want to live with immigrants, which makes areas with a high percentage of migrants, like Arizona, flashpoints for anti-immigrant sentiment.

Saiz contends that the Arizona law is more of a symbol than an effective tool to curb illegal immigration because police departments have not received additional resources to carry out enforcement. While the law may not change much in reality, the sentiment underlying it may work as a deterrent to immigration into Arizona. “I think the intent is to send a signal that this is not a friendly place for immigrants, especially for illegal immigrants.” In the long run, however, the law could, in fact, harm Arizona’s already ailing economy, he adds, because it suggests that Arizona is a place where immigrants are not welcome. “This is not a positive signal to be sending in a globalized world.”

An analysis published by Americans for Immigration Reform finds that if all unauthorized immigrants were removed from Arizona, the state would lose $26.4 billion in economic activity and approximately 140,324 jobs.

On the political front, Saiz argues that the law is also likely to hurt the Republican Party, which supported the Arizona legislation, if Hispanic voters who tend to lean Democratic move solidly into that party’s ranks. As a result, the chance that Republicans would make advances in state and federal elections throughout the Southwest through the next two cycles would be diminished. According to the Washington-based Pew Hispanic Center, a research wing of the Pew Charitable Trusts, Arizona is home to two million Hispanics accounting for 30% of the state’s population. A third of those two million were born outside the United States, the majority of them in Mexico.

Of the nation’s 154 million workers, an estimated 8.3 million, or 5.4%, are unauthorized immigrants, according to the Pew Hispanic Center. The percentage is up from 4.3% in 2003, but the increase has leveled off since the financial crisis hit the U.S. economy in 2007. With an estimated 500,000 undocumented immigrants, Arizona falls behind California, Texas, Florida, New York and New Jersey in attracting illegal migrants.

The law has already been challenged in federal court by religious groups and two Arizona police officers who are seeking injunctions to block enforcement of the provisions, which they argue are unconstitutional. Wendy Sefsaf, communications director of the American Immigration Council in Washington, D.C., says immigration is a federal responsibility. State and local measures typically fail because it is impossible to isolate immigrants. “This brings up the issue of how far a state can go without federal support — which is not very far.” She says it is possible the law will never take effect because of the legal actions already filed. “We have seen this happen in other places where similar laws have been tied up in court and cost the jurisdiction a lot of money to defend.”

However, the Center for Immigration Studies (CIS), also based in Washington, D.C., argues that the Arizona law mirrors federal law — which already requires non-citizens to register and carry their documents. According to a CIS factsheet: “The new Arizona law simply states that violating federal immigration law is now a state crime as well. Because illegal immigrants are by definition in violation of federal immigration laws, they can now be arrested by local law enforcement in Arizona.” CIS also says that the law does not pre-empt federal statutes because it takes what is already a federal violation and also makes it illegal in the state.

Meat Packing and Construction

Legal arguments aside, Wharton management professor Iwan Barankay suggests that the recession is partly responsible for driving support for the anti-immigrant law in Arizona and similar sentiment throughout the country. While Mexican immigration to the United States has historically been directed toward California and Texas, in the mid 1990s those markets became saturated with workers. Newer arrivals began to fan out into other communities that had not before been home to a significant Hispanic population. The Pew Center notes that the number of undocumented immigrants in California has nearly doubled since 1990 to 2.7 million, but the state’s share of illegal immigrants nationally declined from 42% to 22% between 1990 and 2008.

Now, with a harsh economic downturn, some residents of the United States and other countries, including many in Central and Eastern Europe which have also experienced high levels of immigration, are concerned that immigrants are going to limit opportunity for native-born residents. “In a psychological sense, people are shifting blame to try to solve the recession by focusing on certain pockets of the population or certain jobs or certain policies,” says Barankay. He suggests that immigration policy is motivated in large part by whether those in power fear immigrants are going to diminish their own chances for economic advancement, even though he says research indicates there is no clear evidence that immigration significantly drives down wages. Barankay also disputes the notion that immigrants live off welfare and don’t pay to support the government, noting that they contribute taxes on the goods they purchase.

Cappelli, however, points out that while the evidence is not overwhelming, basic laws of supply and demand dictate that increasing numbers of immigrants would push down wages, adding that the decline of unions has made it possible for undocumented immigrants to find more employment throughout the country in what were once hard to get, well-paid jobs. For example, he says meat packing in the Midwest and construction on the East Coast were once high-paying jobs that were difficult to enter because of union control. Now, immigrants, including undocumented workers, dominate these industries.

Alex Gelber, Wharton professor of business and public policy, says that some evidence shows that immigration diminishes the wages of native workers. Other evidence shows that immigration does not have a measureable impact on the wages of native workers. Research, he adds, is emerging that shows that new immigration has a bigger impact on the wages of other immigrants than on the wages of native-born workers. He also says that while the controversy over the Arizona legislation may focus political attention on immigration reform in Congress, the direct effect of the Arizona law on average wages throughout the U.S. will be minimal.

Saiz argues that making criminals of people who come to the United States to work is “not in the country’s DNA.” Instead of a locally based measure, the nation needs a concerted approach to immigration that recognizes the contributions of undocumented workers and their families who have been in the United States for years without causing any trouble. In addition, he states, far-reaching immigration policy must be transparent and include employers in the process.

“If you want to think about incentives, the stick has to be on the employers who employ illegals,” he argues. Saiz proposes that employers who are having trouble finding educated workers, like software engineers, become more involved in immigration policy so that the debate is not dominated by the lower end of the income scale. Currently, he notes, the quota system that permits legal immigration to the United States is skewed toward reuniting family members with immigrants who are already in the country, rather than bringing in workers whose talents would help the U.S. economy grow. Employers in need of specialized skills from immigrants all over the world should be allowed to bring in more workers legally in return for stricter enforcement of laws — and increased fines — prohibiting employment of undocumented workers.

He suggests that employers might structure a system of tradable immigration quotas that would shift needed workers to the industries most willing to pay for additional immigrants. The trading system could be organized electronically on the Internet without creating a complicated bureaucracy. Focusing on closing the border, or other disincentives such as the Arizona law, often appeals to political sentiment, he adds, but is not effective in curbing illegal immigration.

Cappelli compares the debate over how to deal with illegal immigration to similar approaches aimed at curbing drug use, which have an overemphasis on those who traffic narcotics, but do little to curb demand from drug users. Offering drug counseling or treatment such as methadone to drug users, he says, would be comparable to allowing employers to hire immigrants in a more regulated fashion. Employers, he adds, will always say they need to have cheap labor in order to compete. In the short term, that’s true. One employer using minimum-wage workers would not be able to compete effectively against a business next door paying workers lower rates under the table. However, Cappelli asks, at what point does that argument end? “Employers always want cheap labor and cheap oil and cheap electricity. If the argument is that we — as public policy — need to provide cheap supplies to keep employers in business, it’s a never-ending process.”

The solution to the nation’s immigration problems, suggests Cappelli, rests on some mix of regulation, blocking the supply of illegal immigrants and reducing employer demand. “There’s a tendency to latch onto the simple solution of putting up a gate…. We can’t do it politically,” says Cappelli. He notes that the Republican and Democratic parties weight the types of solutions differently. Republicans tend toward regulation while Democrats are more inclined to restrict employer demand because employers are not as important to the Democratic base as they are to the Republican constituency.

Sefsaf, of the American Immigration Council, hopes the emotions stirred by the Arizona legislation can be channeled into national immigration reform. “It does feel like it takes something really nasty and punitive to happen to get the debate kicked into steam again.” She says that states often have good ideas that could be incorporated into reform. “We wish people in Arizona would come to Washington and say ‘Fix this.’ Instead they took it into their own hands and are [moving] it in a direction that’s not going to be particularly successful.”

In any case, Cappelli notes, the question of immigration reform was not a major economic issue until Arizona brought it to the forefront. He predicts the furor over immigration that has surfaced in response to Arizona’s actions will die back without major change. “I don’t think the federal government or the Obama administration wants to focus on this issue at all. This wasn’t even on the agenda until Arizona put it there.”